SCIENCE

Vitesse Semiconductor Corporation has reported its financial results for the third quarter of fiscal year 2010 (the quarter ended June 30, 2010).

Third Quarter 2010 Financial Highlights

·         Product revenues of $37.5 million, compared with $36.4 million in the third quarter of fiscal year 2009.

·         Product margins increased to 58.2% from 52.5% in the year-ago quarter.

·         Operating loss of $694,000, compared with operating income of $17.6 million in the third quarter of fiscal year 2009. Operating income in third quarter of fiscal year 2009 included a one-time gain of $16.0 million from the KPMG LLP settlement.

·         Net income of $33.0 million, compared with net income of $12.5 million in the third quarter of fiscal year 2009. The 2010 third quarter includes $32.8 million in non-cash interest income related to a decrease in the embedded derivative valuation. Excluding this interest income, net income would be $229,000.

·         Introduced 12 new products, bringing the year-to-date total to 23. The Company is on target to launch 30 new products this year.

CEO Commentary

"While revenues were below expectations, customer demand for our core products generally remains strong. Our third quarter sales were impacted by ongoing supply chain component shortages as the industry continues to adjust to a rebound in demand," said Chris Gardner, CEO of Vitesse. "This quarter, we achieved the Company's highest product margins in four years. We continued to carefully manage expenses during the quarter, reducing SG&A substantially compared to last year. At the same time, we invested in R&D and benefited from the operating leverage we have achieved during the last four sequential quarters."

"Our new product development initiatives are solidly on track," Mr. Gardner added. "We launched 12 new products in the third quarter, bringing our total for the year to 23. We expect this product cycle to drive our future growth."

Third Quarter 2010 Financial Results Summary

Net revenues for the third quarter of fiscal year 2010 were $37.5 million, a decrease of 15.9% compared with $44.6 million reported for the third quarter of fiscal year 2009 and a decrease of 14.5% compared with $43.9 million in the second quarter of fiscal year 2010. Product revenues were $37.5 million, a 3.2% increase from the same quarter in fiscal year 2009, and a 14.0% decrease from $43.7 million reported for the second quarter of fiscal year 2010.

There were no revenues from licensing intellectual property in the quarter, compared to $8.25 million in the third quarter of fiscal year 2009, and $250,000 in the second quarter of fiscal year 2010.

Carrier networking product revenues were $15.0 million, or 39.9% of product revenues, compared with $16.7 million, or 45.9%, in the year-earlier quarter. Enterprise networking product revenues were $18.7 million, or 49.9% of product revenues, compared with $15.0 million, or 41.1%, a year ago. When Carrier and Enterprise networking product revenues are combined, Vitesse's core products represent 89.8% of the quarter's revenue. Non-core product revenues were $3.8 million, or 10.2% of product revenues, compared with $4.7 million, or 13.0%, a year ago.

Cost of revenues decreased $1.6 million to $15.7 million in the third quarter of fiscal year 2010, compared with $17.3 million in the same quarter in fiscal year 2009. Product margins increased to 58.2% in the third quarter of fiscal year 2010, from 52.5% in the third quarter of fiscal year 2009, as a percent of product revenues. Product margins are product revenues less cost of revenues. We made progress in transitioning our test manufacturing activities from our California facility to an outsource model in an offshore facility resulting in reduced costs of test. Additionally, on-going cost reduction efforts to reduce materials costs and improve product yields have been effective at increasing gross margin.

R&D expenses were $13.7 million for the third quarter of fiscal year 2010, compared with $11.2 million a year ago, an increase of $2.5 million, or 22.1%. Selling, general and administrative expenses decreased to $8.7 million, or 23.1% of net revenues, for the third quarter of fiscal year 2010 compared with $11.4 million, or 25.6% of net revenues, in the third quarter of fiscal year 2009.

Loss from operations was $694,000 in the third quarter of fiscal year 2010, compared with operating income of $17.6 million in the third quarter of fiscal year 2009. Operating income in third quarter of fiscal year 2009 included a one-time gain of $16.0 million from the KPMG LLP settlement, partially offset by the accrual of $3.0 million for an expected SEC penalty related to historical option backdating and certain accounting irregularities.

The Company's third quarter of fiscal year 2010 net income was $33.0 million, or $0.99 per share, compared with a net income of $12.5 million, or $1.08 per share, in the third quarter of fiscal year 2009. Included in the third quarter net income is $32.8 million in non-cash interest income related to the decrease in the fair value of the derivative related to the Company's 2014 debentures. Excluding this non-cash interest income, the Company would have had third quarter net income of $229,000. The value of the non-cash item fluctuates with the value of the Company's stock price and is excluded by management in evaluating operating results.

Balance Sheet Overview

At June 30, 2010, the Company had cash and equivalents of $38.6 million, an increase of $1.4 million from March 31, 2010, and a decrease of $18.9 million from September 30, 2009. Inventory at June 30, 2010 totaled $24.2 million, an increase of $5.4 million from September 30, 2009, while accounts receivable totaled $13.3 million, a decrease of $1.8 million in the same period. The Company's June 30, 2010 working capital position was $45.9 million compared with $39.4 million on September 30, 2009.

Outlook

For the fourth quarter of fiscal year 2010 ending September 30, 2010, Vitesse expects revenues to be in the range of $40.0 to $42.5 million and gross margins are expected to be between 55 and 57 percent. Operating expenses are expected to be between $22.0 and $23.0 million.

The Company's long-term operating model, which assumes a quarterly revenue run rate of $50.0 million or more and is stated as a percentage of product revenue, targets gross margin of 55 to 60 percent; R&D expense of 25 to 28 percent; SG&A expense of 14 to 17 percent; income from operations of 12 to 18 percent; and EBITDA of 15 to 21 percent. The Company defines EBITDA as earnings before interest, taxes, depreciation, and amortization. Management uses EBITDA measures internally to evaluate the Company's operating performance before charges that are considered by management to be outside of the Company's core operating results. In addition, the measures are used for planning and forecasting of the Company's future periods. Further, the Company is also targeting annual inventory turns of five times and accounts payable and accounts receivable in line with normal industry levels.

Conference Call Information

A conference call is scheduled for Monday, August 9, 2010 at 1:30 p.m. Pacific Time / 4:30 p.m. Eastern Time, to discuss third quarter fiscal year 2010 results. To listen to the conference call via telephone, dial 877-683-1150 (U.S. toll-free) or 706-634-1301 (International) and provide the pass code 89665353. Participants should dial in at least 10 minutes prior to the start of the call. To listen via the Internet, the webcast can be accessed through the Vitesse corporate web site at http://www.vitesse.com.

The playback of the conference call will be available approximately two hours after the call concludes and will be accessible on the Vitesse corporate web site or by calling 800-642-1687 (U.S. toll-free) or 706-645-9291 (International) and entering the pass code 89665353. The audio replay will be available for seven days.